Sugar reform: food makers to enjoy cheaper sugar ingredients?

Related tags European union United kingdom British sugar

Food and drink makers could soon expect cheaper sugar ingredients
with Brussels expected to publish its proposals on EU sugar reform
today, writes Lindsey Partos.

Under fierce criticism for distorting sugar prices - currently trading at three times the world price in Europe - and causing high prices to the EU end-consumer, moves for reform have been welcomed by food makers.

They see the changes as leading to a much more liberal sugar trading structure, and as a result, cheaper sugar ingredients.

"This is a very, very good start,"​ said David Zimmer, secretary general at the European chocolate, biscuit and confectionery industries association CAOBISCO, commenting on the Commission's White Paper that indicated sugar reform last year.

CAOBISCO represents an industry that uses some three million tonnes of sugar per year, and 70 per cent of the EU sugar supplies, in a business worth over €40 billion.

Asked if the proposal would mean cheaper sugar ingredients for manufacturers, Zimmer said he "hoped it would lead to competition in the market".

Sugar users would no longer be obliged to buy from within national borders and between EU members - as is currently the case - allowing them to source from competitive markets, for example Brazil and Australia, and ultimately buying in sugar at a reduced rate.

In extreme cases, companies using sugar have only one source for their sweet ingredient. In the UK, for example, British Sugar, owned by Associated British Foods, is the key supplier of sugar from beet, and Tate & Lyle the equivalent for cane sugar.

UK food manufacturers buy the majority of their sugar - 70 per cent - from these two companies. A situation that, critics claim, leaves them vulnerable to stiff pricing from the two sugar giants.

"Competition in the market must be the underpinning principle for reform of the EU sugar market,"​ commented Alain Beaumont, secretary general of the European Sugar Users group CIUS, which has a combined annual turnover of €70 million.

The Commission indicated last year that reform would involve quota cuts of 16 per cent, and intervention price cuts of 33 per cent, starting in 2005/06.

But a recent WTO ruling highlighted the level of surplus sugar the EU is dumping onto world markets, which could imply pressure for more aggressive cuts.

While the food and drink manufacturers are likely to benefit from the reform, three major European ingredients suppliers will lose out.

Profits at UK sweetener firm Tate & Lyle and Danish ingredients firm Danisco are expected to be hit hard by the proposed reform.

While Associated British Foods appears less vulnerable.

"We believe ABF is well placed to offset any potential decline in sugar profits: the group has been consistently reducing its dependency on sugar profits, and is well placed to expand through acquisitions,"​ say analysts at Goldman Sachs.

They forecast a 30 per cent fall in sugar profits for ABF and Danisco, and over 40 per cent for Tate & Lyle in 2006/09.

The analysts add that sugar reforms could have a knock on effect on Tate & Lyle's European isoglucose (otherwise known as High Fructose Corn Syrup), currently under quotas in the EU and representing 5 per cent of Tate & Lyle's group business.

AB Foods, which makes Silver Spoon sugar, was the main riser in the FTSE 100 yesterday, up 18 to 806p ahead of the proposals. Tate & Lyle fell 5¼ to 478¾p.

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